Why Mark Twain Was a Terrible Investor

Why Mark Twain was a terrible investor... Cautionary investing tales... An 'all in' gamble... Going bankrupt... How to avoid the same mistakes... Start 2020 off right with an exciting live event...

Most writers would love to be mentioned in the same breath as Mark Twain...

His The Adventures of Huckleberry Finn is among the most commonly assigned novels in American high schools, behind only William Shakespeare's Macbeth and Romeo and Juliet, according to the Center for the Learning and Teaching of Literature...

And novelist William Faulkner wasn't alone in his opinion when he said that Twain was "the father of American literature."

Twain is also endlessly quotable. One of my (Corey McLaughlin) favorites is this one... "The difference between the right word and the almost right word is the difference between lightning and a lightning bug."

And during his lifetime, Twain was rewarded for his literary achievements. He made a ton of money from his writings, as well as on the lecture circuit.

This brings me to the point of today's Digest...

One of the most iconic figures in American history also lost boatloads of money...

As a writer, it would be an honor to be compared with Twain. But would I want to be linked in any way to his money-management skills? Heck no.

Twain was a downright terrible investor and businessman.

The good news is, you can learn from his failures and apply these lessons to your own portfolio today...

The stories of Twain's financial troubles are almost as common as his famous quotes...

In his documentary Mark Twain, Ken Burns told many of the stories about Twain's unsuccessful investments in new inventions and technologies of the late 1800s...

In particular, he spent $300,000 (the equivalent of roughly $7 million in today's dollars) over about 15 years, starting in 1880, on investments in the Paige typesetting machine, which was designed to replace human typesetters. Twain once said of the machine...

It could do anything a human could, except drink, swear, and go on strike.

That is, when it worked. The Paige typesetting machine was always breaking... And it had so many parts that it was hard to fix. It never turned a profit...

Still, this was an industry Twain knew well – publishing. How could he fail?

Twain nearly sank all his money into the Paige typesetting machine...

He could have invested his fortune in any number of different investment vehicles. Mutual funds were in their infancy back then, for example. But he was dead-set on just this one printing project...

Twain went so far as to invest a good chunk of his wife's inheritance in the machine. He also borrowed against the assets of his own publishing company.

That proved to be a terrible mistake... In today's terms, Twain suffered from what we'd call a "lack of diversification," poor risk management, and ignoring smart asset allocation.

Much to Twain's dismay, a competitor, the Linotype machine, came along and rendered the Paige typesetter obsolete before it could be perfected and produced at scale.

In the end, only two Paige typesetters were ever made. And Twain went broke because of this "all in" gamble...

He eventually had to sell his family's home in Hartford, Connecticut, which he had built years earlier. The family packed up and moved to Europe... Depressed by the financial failure, he wrote to friends back in America, in 1890...

Merry Christmas to you. And I wish to God I could have one myself before I die.

Not only did Twain lose his money, but the upside-down investment – along with a string of health problems in the family – is considered to have sapped Twain of his trademark wit and humor.

In the years that followed, Twain traveled back to America to give speeches and started making a little bit of money again... However, in 1894, at the urging of friend Henry Rogers, then a principal of the Standard Oil Company, Twain filed for bankruptcy.

Rogers took charge of Twain's money, and eventually, he paid off all his debts.

But that might not even be the worst part of Twain's investing saga...

Along the way, Twain passed up the biggest moneymaking opportunity of his life...

Investing in Alexander Graham Bell's telephone.

Bell asked Twain personally if he wanted to invest in his new technology. Twain declined, saying he "didn't want anything more to do with wildcat speculation," though later that year he boasted about installing a telephone at his house.

Meanwhile, Twain noted that a local dry-goods clerk in Hartford bought $5,000 worth of stock from Bell. It was a significant sum for him.

Twain then went to Europe. And when he came back over a year later, he said...

[The clerk's] telephone stock was emptying greenbacks into his premises at such a rate that he had to handle them with a shovel.

It is strange the way the ignorant and inexperienced so often and so undeservedly succeed when the informed and the experienced fail.

The lesson in this story is to heed some timeless guidance from our founder, Porter Stansberry...

Specifically, we're talking about what Porter said in a classic essay that we shared again in last weekend's Masters Series. If you missed it, I suggest you give it a full read right here.

The essay – which first appeared in the December 16, 2016 Digest – focuses on a few of the most critical decisions any investor can make: asset allocation, positing sizing, and risk management.

These words might not sound sexy, but the simple yet often taken-for-granted concepts are proven fundamentals of a lucrative long-term portfolio. As Porter wrote...

For some reason, it seems that most people don't take good investment decisions (asset allocation, position sizing, and risk management) seriously...

Likewise, it seems like some law of human nature dictates that most people will only buy investments that are extremely risky and volatile. Subscribers tend to completely ignore our best advice, which is to build a portfolio around a firm foundation of super-high-quality, low-volatility stocks.

I'd estimate about 90% of your actual investment results are dictated by your allocation decisions – how much capital you put into each position – not which particular stocks you buy.

I want that to stop forever.

It's easy to be tempted to overweight certain assets in your portfolio... or take a gamble on speculations because they just feel right...

Maybe you feel really good about the potential in emerging markets in the coming decade... or Roku (ROKU) stock... or the Paige typesetting machine. And maybe you've done your research.

As long as you know the risks of an investment, that's fine... But most investors don't know how to properly value a stock or a bond (or even how to buy bonds). Even if they think they're taking a smart risk, they might not be.

That's why it's a terrible idea to go "all in" on any one thing. That's why we always say the most valuable thing we provide is not specific stock recommendations... even when they soar in value. It's our guidance on concepts like allocation, position sizing, and risk management that really determine whether you'll be a successful investor.

Considering these concepts – and when the ideas are put into action – can allow us humans to rest easy and find our "sleeping point," as author Burton Gordon Malkiel writes in his landmark book A Random Walk Down Wall Street.

They also protect investors from "not being able to predict the future," as market analyst Charlie Bilello put it so well recently. (We were once again reminded of that this week. Thankfully, the Middle Eastern geopolitical concerns have cooled for the moment... and U.S. stocks bounced back for a second straight day today.)

Several academic studies demonstrate why portfolio allocation is far more important in determining your results than simply which stocks or bonds you buy. Yale finance professor Roger Ibbotson and Morningstar Director of Research Paul Kaplan published one of the best studies on the subject in 2000...

They looked at 94 U.S. mutual funds and several asset classes... and concluded the differences in asset allocation among the funds explained essentially all of the variance in their returns... Differences in stock picks made almost no difference whatsoever to total portfolio returns.

That's why most professional investors (like the top hedge-fund managers) allow analysts to do the stock picking, while they focus almost exclusively on the core allocation decisions.

This is exactly the approach we take in Stansberry Portfolio Solutions, too...

We launched this suite of products in 2017, and we're really proud of them...

Each month, our director of research Austin Root picks "the best of the best" from our leading publications and provides a comprehensive allocation – down to exactly how many shares of each stock you should buy.

This is the type of guidance you'd get from top hedge-fund managers. And we're not talking about just one portfolio, either... We offer a diverse set of fully allocated portfolio strategies. There's one focused on capital appreciation... another on earning income... another on defensive strategies to prepare for the next downturn... and a "total portfolio" product that covers everything.

And as longtime readers know, they've beaten the broader market...

In 2019, The Capital Portfolio returned 42% – beating the broader S&P 500 Index by a little more than 11 percentage points... The Income Portfolio returned more than 27%, including nearly 5% in safe, sturdy income... and The Total Portfolio was up more than 32%, ahead of the S&P 500 despite being much less volatile and more safely invested.

There's simply no better way to put our recommendations into action than to subscribe to these products... And there's no better time to do it than right now.

As you may have seen, Porter, Dr. Steve Sjuggerud, and Dr. David "Doc" Eifrig are sitting down on Tuesday night for a live, free event. During this event, they'll share their latest thoughts on what they expect from the markets in 2020...

And then they'll share how best to put all that information into action – in a smartly allocated portfolio. If only Twain had the opportunity to listen to this discussion back in his day... we might have a few more great American novels to enjoy.

Click here to reserve your spot for what we expect will be an exciting and informative live event. The action will start promptly at 8 p.m. Eastern time on Tuesday, January 14.

One more thing... if only Twain had as good a handle on finance as Shakespeare did...

He'd have fared much better.

At the outset of Shakespeare's Merchant of Venice, written 400 years ago, the playwright offers this advice on diversification, through the character Antonio...

Believe me, no. I thank my fortune for it —
My ventures are not in one bottom trusted,
Nor to one place, nor is my whole estate
Upon the fortune of this present year.
Therefore my merchandise makes me not sad.

We prefer plain English, but the point is nonetheless a good one.

New 52-week highs (as of 1/8/20): AllianceBernstein (AB), Blackstone (BX), DocuSign (DOCU), Electronic Arts (EA), New Oriental Education & Technology (EDU), Facebook (FB), Alphabet (GOOGL), Huntington Ingalls (HII), KraneShares CSI China Internet Fund (KWEB), Medtronic (MDT), Macquarie Infrastructure (MIC), Norilsk Nickel (NILSY), NetEase (NTES), Nuveen Municipal Value Fund (NUV), Nvidia (NVDA), ProShares Ultra Technology Fund (ROM), Splunk (SPLK), Spotify Technology (SPOT), TAL Education (TAL), and The Trade Desk (TTD).

In today's mailbag, more on asset allocation... Have a question or comment for us? As always, send your notes to feedback@stansberryresearch.com.

"Porter, Steve, Doc, Dan and team, thank you for providing such a great service. Due to the excellent year we had in 2019 thanks to your guidance, we decided to open and fund Roth IRA's for our five oldest granddaughters, ages 25, two at 22, and two at 19...

"Since they are looking at about a 40-year time frame before retirement we wanted to give them some ideas on investments. I recall that Warren Buffett said he would tell his wife to put her money in Vanguard total stock market index, someone else said to pick a trophy asset dividend-payer that they think will be around for another 40 years, Dan suggested value stocks for the next 10 years, or the S&P 500, etc., etc. You get the point.

"I know that you can't give individual financial advice but could you address the general question of where they should start. As their accounts grow they can diversify, hopefully using guidance from Stansberry. Thanks for considering the question and keep up the great work." – Stansberry Alliance member Richard M.

McLaughlin comment: Richard, good on you for starting your granddaughters on the investing journey!

You're right, we can't give individual financial advice. But given the topic we're writing about today, we'd be remiss not to direct your attention (or any investors' eyes) to our Stansberry Portfolio Solutions products.

For years, Stansberry Research has received feedback from subscribers like this one: "I get so many different recommendations from you guys. How am I supposed to decide which ones to buy, and how much to invest in each idea?"

We provide the answer in our Portfolio Solutions products. And again, we'd encourage you to check out our free live event next Tuesday night, January 14, at 8 p.m. Eastern time...

During the event, you'll hear all of the top ideas for investing in 2020 from Porter, Steve, and Doc. We're sure you'll come away with plenty of ideas for your granddaughters. Again, if you're not already signed up, you can do so right here.

All the best,

Corey McLaughlin
Baltimore, Maryland
January 9, 2020